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I APPEAL CORP. v. KATZ

November 9, 2005.

I APPEL CORP. a/k/a ALLIANCE CORP., Petitioner,
v.
NORMAN KATZ, Respondent.



The opinion of the court was delivered by: MICHAEL MUKASEY, Chief Judge

OPINION & ORDER

I. Appel Corporation moves to confirm an arbitration award against Norman Katz that Appel claims was rendered by the American Arbitration Association ("AAA") on or before April 15, 2005 (the "April 15 Award") and to vacate a subsequent award against Katz issued by the AAA on April 18, 2005 (the "April 18 Award"). Katz opposes Appel's motion to confirm the April 15 Award and vacate the April 18 Award, and cross-moves to confirm the April 18 Award and lift this court's stay of enforcement of a judgment entered against non-party Herbert Feinberg ("Feinberg") on June 13, 2001 in a related arbitration. This court has jurisdiction based on diversity of citizenship, 28 U.S.C. § 1332 (a) (1). For the reasons set forth below, Appel's motion to confirm the April 15 Award and vacate the April 18 Award is denied, and Katz's motion to confirm the April 18 Award and lift the stay of the June 13, 2001 judgment is granted.

  I.

  On June 15, 1996, Katz entered into an agreement (the "Agreement") with Feinberg, his former business partner, to sell his interest in Appel for consideration that included an amount "equal to fifty percent (50%) of the net worth of [Appel] as of May 31, 1996 . . ." (Declaration of Steven G. Storch ("Storch Decl."), Ex. E ("April 18 Award"), at 1) Feinberg paid Katz part of the consideration for Katz's interest, and was to pay the remainder after Appel's accountants at Mahoney Cohen Rashba & Pokart, C.P.A., P.C. ("Mahoney Cohen") assessed the company's net worth. (Id.) Mahoney Cohen concluded that Appel's net worth was far less than the parties anticipated at the time of the Agreement due to a significant downturn in the company's fortunes — a downturn that ultimately forced Appel to file for bankruptcy. (Id.) As a result, Feinberg refused to pay Katz any further installments on the purchase price. (Id.)

  The Mahoney Cohen "net worth" assessment and Feinberg's refusal to make further payments under the Agreement have resulted in almost ten years of litigation before several arbitral panels and numerous federal and state court judges. As Judge Haight aptly observed more than two years ago, "[t]hese two former friends and business partners" — who are now about 80 years of age (see Katz Opp'n Mem. at 2; Appel Reply Mem. at 2 n. 1) — "seem determined to litigate against each other unto death." See Katz v. Feinberg, No. 99 Civ. 11705 CSH, 2003 WL 21750102, at *2 (S.D.N.Y. July 29, 2003). Rather than recount all of these proceedings here, this court will focus only on the pertinent details of the two arbitrations that are implicated by the present action.

  The first arbitration was sought by both parties in 1997 to resolve claims by each that the other had breached obligations under the Agreement, and resulted in an award in favor of Katz. See generally Katz v. Feinberg, 167 F. Supp. 2d 556 (S.D.N.Y. 2001), aff'd 290 F.3d 95 (2d Cir. 2002). Although the details are generally not relevant, that arbitration bears on the present action because the June 13, 2001 judgment partially confirming the panel's award and ordering Feinberg to pay Katz $363,496.29 plus pre- and post-judgment interest was stayed by Judge Haight in September 2001.*fn1 See Katz v. Feinberg, No. 99 Civ. 11705 CSH, 2001 WL 1132018 (S.D.N.Y. Sept. 24, 2001). Judge Haight imposed the stay because Feinberg claimed a contract right to offset any award Appel might receive from Katz in a related arbitration (the "second arbitration") against the amount of the judgment, and presented "credible evidence" that cast doubt on Katz's ability to pay such an award absent the stay. See id. at 4. The stay was lifted by Judge Haight in July 2003, see 2003 WL 21750102, at *3, but was re-imposed by me on November 16, 2003. (See Storch Decl., Ex. A ("November 16 Order")) Katz's cross-motion asks me to lift the stay and thus allow enforcement of the June 13, 2001 judgment.*fn2

  The second arbitration, which Appel brought against Katz in 1999,*fn3 commands most of the court's attention here. In the second arbitration, Appel sought expenses it had incurred in resolving various legal proceedings that were pending at the time of the Agreement and were listed under the Agreement's Exhibit D (the "Exhibit D Proceedings"). (April 18 Award at 1) The expenses were recoverable because Section 8 (d) of the Agreement directed that Katz and Feinberg share equally any losses resulting from the resolution of the Exhibit D Proceedings, while affording Katz 50% of any "Net Proceeds" (as defined in the Agreement) collected from such Proceedings. (Id. at 2) When the arbitration panel — two arbitrators appointed by the parties and a third appointed by the AAA — denied Appel any recovery on the ground that the claim for the Exhibit D losses belonged to Appel's creditors, Appel moved here to vacate the panel's actions under the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16 (2000). (See Storch Decl., Ex. B ("November 5 Transcript"), at 3)

  On November 16, 2003, this court granted Appel's motion and vacated the panel's award on grounds spelled out in a bench opinion issued on November 5. (Storch Decl., Exs. A & B) Specifically, this court found that the panel "manifestly disregarded the law" by concluding that Appel's claim for the Exhibit D losses was not properly assigned by the company's creditors. (November 5 Transcript at 4-7) In addition, the court concluded that the panel's denial of Appel's requests for an evidentiary hearing amounted to "fundamental unfairness and misconduct" sufficient to warrant vacatur under 9 U.S.C. § 10 (a) (3). (Id. at 8-9) Because the award was vacated and it again was possible for Appel to recover proceeds that Feinberg could use as a setoff against the June 13, 2001 judgment, this court re-imposed the stay. (Id. at 10)

  Consistent with the November 16 Order, the parties returned to arbitration to contest again Appel's claims for the Exhibit D losses. The claims were heard by a new panel consisting of a new neutral arbitrator, David Rubin, Esq., a new arbitrator selected by Appel, John Byrne, Esq., and Stephen Katz, the same arbitrator selected by Katz in the first arbitration. (Storch Decl. ¶ 2) The panel held five hearings over the course of two months, considered over 300 exhibits, heard testimony from five witnesses, and reviewed extensive submissions from both parties. (Declaration of Donald L. Kreindler ("Kreindler Decl.") ¶ 4) The proceedings were declared closed by the arbitrators on February 7, 2005. (Storch Decl., Ex. C ("February 8, 2005 Letter")) Under AAA rules, the arbitrators were to render their award within 30 days, or by March 9, 2005. (Id.; see also American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures ("AAA Rules"), R-41)

  In early March, at the panel's request, the parties extended the deadline for rendering an award to April 8, 2005. (Storch Decl., Ex. C) On April 5, the panel again requested additional time to render the award and the parties again consented, extending the award due date to Friday, April 15. (Id.)

  On April 15, the panel once more found itself unable to issue an award. Accordingly, Karen Smith, the AAA administrator for the Appel arbitration, contacted the parties to inform them that the panel would be unable to render the award that day and was requesting an extension until April 22, 2005. (Storch Decl. ¶ 4; Kreindler Decl., Ex. A) It is not disputed that Katz, through counsel, consented to this request. Nor is it disputed that Appel's counsel, Steven Storch, also initially consented when contacted by Smith at 4:30 p.m. after being advised by Smith that clerical issues caused the delay. (Storch Decl. ¶ 4; Supplemental Declaration of Steven G. Storch ("Suppl. Storch Decl.") ¶ 3)

  Twenty minutes later, however, Storch changed his mind. At 4:51 p.m., he called Smith and stated that he could not say whether Appel objected to the extension until he knew whether all of the arbitrators had requested it. (Storch Decl. ¶ 5; Suppl. Storch Decl. ¶ 3) Smith replied that the request came only from Rubin and Katz because she was unable to contact to contact Byrne and that the reason for the request was that Rubin had made a change to the award that he had not yet been able to discuss with Byrne. (Storch Decl. ¶ 5) Dissatisfied with this explanation, Storch orally withdrew his consent to the extension and, after being told that no award could issue that day, informed Smith that Appel "reserved all rights" if the award did not issue that day. (Id.) Storch confirmed his withdrawal in an e-mail to Smith that he composed from his Blackberry while at a mediation, but the e-mail was not transmitted until 9:02 p.m. due to wireless access problems at the site of the mediation. (Storch Suppl. Decl. ¶ 4)

  Complicating matters further, at some point on the afternoon of April 15, Smith appears to have faxed to Storch and Donald Kreindler, Katz's counsel, a letter informing them that the award due date would be extended to April 22, 2005, and noting that "[b]oth parties have orally agreed to the extension." (Kreindler Decl., Ex. A) Interestingly, Kreindler's copy of the fax contains two time stamps — one at the top of the page reading 3:41 p.m. (i.e., before Smith first contacted Storch to request the extension) and the other at the bottom reading 4:42 p.m. (i.e., after Storch's initial consent, but before his attempted withdrawal). (See id.; see also Storch Suppl. Decl. ¶ 5) It is unclear which of these time stamps, if either, is correct. The letter asked both parties to sign the letter to confirm authorization for the extension and return it to the AAA. (Kreindler Dec1., Ex. A) Kreindler appears to have signed and returned the form on April 18. (See id.) Storch says he has neither recollection nor record of receiving a copy of the letter signed by Kreindler, but it is unclear from his declaration whether he received an unsigned copy of the letter direct from the AAA. (See Storch Suppl. Dec1. ¶ 5) The fax cover sheet attached to Kreindler's copy is addressed to both parties and lists Storch's contact information. (See Kreindler Decl., Ex. A)

  On Monday, April 18, Smith faxed the parties a "duly executed facsimile copy of the Award" signed by arbitrators Rubin and Katz, noting in her cover letter that Byrne had dissented. (Storch Decl., Ex. E) The fax did not, however, contain any dissent from Byrne. The award ordered Katz to pay Appel $96,424.50 plus interest as his share of the losses in the Exhibit D Proceedings.*fn4 (April 18 Award at 7)

  On April 20, Smith again faxed the parties, this time enclosing a document titled "Statement of Arbitrator John F. Byrne, Esq." and dated April 19. (Storch Decl., Ex. F ("Byrne Statement")) In the statement, Byrne argued that the April 18 Award was a "nullity" and "unenforceable" because he and arbitrator Rubin had duly executed a different version of the award on or before April 15 ("the April 15 Award"). (Byrne Statement at 1-2) Byrne attached an unsigned copy of this earlier award to his statement and noted that he had executed it on April 13 and sent it to the AAA via facsimile and United Parcel Service. (Id. at 1) He asserted also that Rubin had executed the earlier award and "at least forwarded a facsimile copy" to the AAA by April 15, a fact he alleged the AAA could confirm. (Id.) The earlier award was almost identical to the April 18 Award, but ordered Katz to pay Appel $186,632.00 plus interest for the Exhibit D Proceedings — a difference of approximately $90,000. (April 15 Award at 7)

  Byrne's statement also contained additional details about the events leading up to the April 18 Award. Specifically, Byrne explained that he had informed Rubin and the AAA in advance that he would not be available on April 14 or 15. (Byrne Statement at 1) Therefore, he learned about the extension only upon return on April 18, when he found out that Rubin had instructed the AAA not to deliver the April 15 Award because Rubin wanted to discuss some changes with him. (Id. at 1) These changes were highlighted in a blue-lined revised draft of the award that Rubin had e-mailed to Byrne with a cover note on April 15, but that Byrne did not receive until April 18. (Id.) On the morning of April 18, Byrne vigorously contested the revisions in a telephone conversation with Rubin and said that he would not sign the revised award. (Id.) Byrne also allegedly raised the issue of the execution of the April 15 Award and was told by Rubin that "he did not want to get into that." (Id. at 2) Soon after the call, Byrne received an e-mail from the AAA advising the panel that the parties had withdrawn consent to the extension and that the award ...


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